business and management notes (74 pages)

7/31/2019 Business and Management Notes (74 Pages)

http://slidepdf.com/reader/full/business-and-management-notes-74-pages 1/74



E07B-Hanif-May 09

Business Activity

INPUT - a.k.afactors of prodution

1. Land - includes land andall natural

renewable/unrenewablesresources

2.Capital - anythingthat is owned by abss & used to make

prodution easier &more efficient

3.Labour -workforce of a

business

4.Enterpreneur -willing to takerisks (loss and

profit)

3.Labour -management,

skilled workers,manual workers

4.Enterpreneur -someone who

organizes otherinputs to initiate theprocess of prodution

PROCESS - convertsresoures to goodsand services

1.Form - changephysical to useful

goods

2.Place - send tothe right place

(transportation)

3.Time - sellduring high

demand

4.Possession -promotion &

advertisement (will

lead to possessionby the consumes)

OUTPUT

1. Goods andservices -

physical andtangible goodsnon tangible

products sold topublic

2. Wastage

1.1 NATURE OF BUSINESS ACTIVITY

(A)BUSINESS ACTIVITY



E07B-Hanif-May 09

(B) BUSINESS FUNCTION

Production/operation – makes the product/ deliver

the services

Marketing – selling the business goods & services,

positioning them within the market

Finance – financial reporting and control. Rising of the

capital necessary to run the business.

Human resources/personnel – hiring, firing and

payroll.

(c)TYPES OF PRODUcTION



E07B-Hanif-May 09

1.2 TYPES OF ORGANIZATION

(A) PRIVATE SECTOR AND PUBLIC SECTOR

PRIVATE SECTOR PUBLIC SECTOR

TYPES OFPRODUCTION

PRIMARY SECTOR -including that extracts &

uses the naturalresources of the Earth

eg:mining gold

SECONDARY SECTOR -

including that manufacturesgoods using the raw materialsprovided by the primary

sector

eg:rocket making, textile,biotech TERTIARY SECTOR -

provides services toconsumers & the other

sectors of industry

eg:insurance,transportation,entertainment



E07B-Hanif-May 09

Reasons forsetting up a

business

Independence

•want to have a fullcontrol over thebusiness andprefer to maketheir own decision.

To gain morereward.

•by doing business,they will gain extraprofit compared toprofit gained bybeing employed.

Redundancy•employees who

are made

Commitment to a

product

Satisfy creative needs.

•an individual that are verycreative may channel theircreativity through business.ex. a person that can createa beautiful souveneir can sellit to the tourists.

FEATURES Organization owned by private individuals or

private of people

Have a clear aim of seeking profit for their owner

Organization owned by and

controlled by the government

Objective is to provide service

rather than profit for owners

Run essentially for the benefit

of community

DIVISION

Unincorperated bssBss-no legal difference between the owners and the

bss

Tend to be small,owned either by one person or a

few partners

Incorperated bss

Separated legal identity from its owners

Bss can be sued,can be taken over and can be

liqiudity

Most are classed as the non-

market sector: goods and

services provided free to

consumers and are financed

out of taxationSome (i.e.post office) are in

the market sector as

consumers are required to

pay for the services.

Some public sector bss have

been transferred from the

public to the private sector

(B) STARTING A BUSINESS

Pivate sectorbusiness

organisation

Unincorperatedbss

sole trader partnership

Incorperated bss

private limitedcompany

public limitedcompany



E07B-Hanif-May 09

eason for setting up ausiness.

it has been explained inthe previous page.

Business idea

•it can come from manyplaces like the existingskills when doing another

job, adaptation of anexisting product, marketsearch, idea from collegueetc.

Consider success of a business

•The factors

•the basic business idea.

•finding out about the market.

•marketing and promotion

•people

•finance

•the product or service offered

Planning

•a statement that outlines the waythat the business will achieve itsaims and objectives.

•functions:

•a clear idea of its direction andoperation.

•to show the bank or otherinstitutions its likely position andability to pay back a loan.

•identify the problems earlier•highlight its strenghths and

weaknesses

Starting a business

•influenced by:•Finance

•sources of funds:

•personal savings or past earnings

•funds from partners or investors.

•by paying the machinery that has been bought at a later date.

•bank or other financial institutions.

•etc.

•Getting advice.

•in the form of:

•a telephone number, email or internet site of a specialist.

•a detailed discussion or interview

•training videos or seminars•sources:

•individuals

•banks

•enterprise agencies

•others.



E07B-Hanif-May 09

Possible problemsfaced by start-ups

Entrepeneur.

•an individual might has lake of skills, experience. vision,ambition and motivation.Therefore a mistake can be

done when making importantdecision.

Basic ideas.

•the fresh product must beappealing enough to themarket in order to get profitang being recognized.

The funding.

•inadequate initialfunding can cause aproblem to the starts-up.Promotion.

• method of sales andpromotion is notappropiate. Plus,there may be nounique selling point(USP).

High competition.

•a new business may have tosurvive in a market that is fullof competition.

Planning

•a new entrpeneur may havea non-proper businessplanning in terms of marketing, advertising,finance and others.

(C) PROFIT-BASED ORGANIZATIONS

TYPES SOLE TRADER PARTNERSHIP



E07B-Hanif-May 09

FEATURES- Owned by just one person

- The owner runs the business and may

employ any number of people to help.

- Retain full control of the business.

- Owner enjoys all the profits.

- He/she personally liable for all the debts

and all the decision made.

- Setting up is very straightforward. No legal

formalities needed.

- Some types of business need to obtain

special permission before landing

Once turnover reaches a certain

level sole trader must register for

VAT

Must pay income tax and

National Insurance contributions.

Some types of business need a

license such as alcohol, supplying

taxi service or public transport.

Must comply with legislation

aimed at business practice. E.g

they must provide healthy and

safe working conditions for their

employees.

- A partnership has more than one

owner.

- It is usual for partner to specialize

- There are no legal formalities to

complete when a partnership is

formed. However partners may draw

up a DEED OF PARTNERSHIP.

This is legal document which states

partner rights. It cover issues such as :

How much capital each

partner will contributes.

How much profits and losses

will be shared

Procedure for ending

partnership

How much control each

partner will have.

Rules for taking new partners

ADVANTAG

ES

- Freedom and flexibility ( can choose the

hour he/she want to work or holiday.)

- Enjoyment of all the profits

- Absence of legal formalities

- The owner is in complete control and is

free to make decisions withoutinterference.

- No legal formalities when setting up

business

- Each partner can specialize

- More finance can be raised due to

have more than one owner

- Can share the workload- Sharing of losses

DISADVANT

AGES

- Sole trader have UNLIMITED

LIABILITY.

- Illness can stop the business activity.

- The owner can be sued by the customers in

the event of dispute due to it is

unincorporated business.

- If the person loses interest or die, then the

business will cease.

- Limited scope for economic of scales.

- Profits need to be shared amongst

more owners.

- Partners may disagree when making a

decision

- The partnership can be end when one

of the partner die

- Any decision made by one partner on

behalf of the company is legally

binding on all other partner.- Can be sued by customers

FEATURES of companies :

Limited companied have separate legal identity from their own owner.

They can own assets, form contracts, employ people, sue and be sued in their own right.

The owners have LIMITED LIABILITY.

The capital of limited company id divided into shares.



E07B-Hanif-May 09

Limited company runs by a director appointed by the shareholders.

The board of Director is accountable to shareholders and should run the company as the shareholders wish.

If they do not perform well, they can be ‘voted out’ at an Annual General Meeting (AGM)

Companies pay corporation tax.

A limited company must have minimum of 2 members up to no upper limit

FORMING A LIMITED COMPANY :

2 DOCUMENTS – Memorandum of Association & Articles of Association

The memorandum gives detail about the company.

The Articles of Association deal with the internal running of the company.

The two documents will be sent to the Registrar of Companies with the names of director

If they are acceptable, The Certificate of Incorporation will be awarded to allow them to trade.

They also must submit a copy of its annual accounts to the Registrar each year.

TYPES PRIVATE LIMITED PUBLIC LIMITED

FEATURES

- The business must ends in Limited or

Ltd.- Shares must only be transferred

‘privately’ and all the shareholders must

agree with the transfer.

- Shares are not advertised for general

sale.

- Often as family business owned by

members of family or closed friends.

- Ends with Plc.

- The shares of the company can be bought andsold by the public on the stock exchange

ADVANTAGES- Shareholders have limited liability.

- More capital can be raised as there are

no limit on the number of the

shareholders.

- Control of the company cannot be lost to

the outsiders.- Business will be continued even if one

of the owner dies

- Shareholders have limited liability

- More power can be enjoyed due to their large

size

- Huge amount of money can be raised from th

sale of shares to the public

- Production costs may be lower as firm maygain economies of scale

- Easier to raised finance since financial

institution are more willing to lend to plc.

DISADVANTAGES- -Profits have to be shared amongst large

number of shareholders.

- There are legal procedures to form up a

business

- Firm does not allow to sell shares to

public, This will restricts the amount of

capital can be raised

- - Financial information filed with the

Registrar can be inspected by public.

Competitor could use this advantage.

- The setting up cost can be very expensive

- It is possible for an outside to take control of

the company since everyone can buy their

shares.

- All of the company’s account can be inspecte

by members of the public.

- Because of their size, they are not able to dea

with the customers in personal.

NON PROFIT ORGANIZATIONS



E07B-Hanif-May 09

IMPORTANCEof

ORGANIZATIONALOBJECTIVES

Determine therole of theemployees

Determine thestrategy to be

done.

Provide shareholderswith a clear idea of

the business in whichthey have invested.

Provide asense of

direction forthe business.

Provide abasis fordecision-making.

Measurementof

Achievement.

A trust, company or incorporated association establishes for charitable purposes only.

Characteristics

- Usually non-profit organizations.- Sometimes referred to as foundations.

- Normally subjected to some form of supervision by the government to prevent charity fraud and to allow the

government to influence the scope and agenda of charities.

- Generally enjoy tax exemptions for their income and donors generally enjoy tax relief for gifts for charities.

1.3 ORGANIZATIONAL OBJECTIVES

(A)THE IMPORTANCE OF OBJECTIVES



E07B-Hanif-May 09

SSpecific MMeasurable AAgreed R T

Realistic Time-specific

Content & Nature

of Objectives

Used to asessthe business'performance.

SMARTStates thegoal of thebusiness

What should amission statement

has?

Boundaries forthe organization

A vision of whatthe organization

wants to be

A statement of thefundamental purposeof the organization so

as to inspire thosewho work for it.

Guidance fordecision-making

A statement of values to guide

individualbehaviour.

A statement of thecharacter of the

organization and thecustomers it seeks to

serve.

(B) STATEMENTS



E07B-Hanif-May 09

Characteristicsof a well-producedmission-

statement.

Provideinformation and

inspiration totheir employees

Outlines clearlythe way ahead

for theorganization.

Provides adefinition of

success.

Provides a livingstatement that canbe translated into

goals and objectivesat each level of organization.

Providesinformation and

inspiration to theiremployees

TERM(S) MEANING(S)

Mission Statement A statement of the business core aims, phrased in a way to motivateemployees and to stimulate interest by outside groups.

Vision/AimA statement of the purpose of the business, usually not specific and

mainly to attract stakeholders

Objective A goal that an organization or individual wants to achieve.

Strategic objectives

What the organization wants to achieve to remain competitive & ensure

its long-term sustainability

Example: To enlarge market share

Tactical objectivesMore to short-term departmental performance to obtain strategic

objectives.



E07B-Hanif-May 09

AIM

CORPORATEOBJECTIVES

DIVISIONALOBJECTIVES

DEPARTMENTALOBJECTIVES

INDIVIDUAL OBJECTIVES

AIM• To maximise shareholders value

CORPOR

ATEOBJECTIV

ES

• To gain profit of all divisions by 10% a

year

DIVISIONAL

OBJECTIVES

• To increase market share by 10%

DEPARTMENT

OBJECTIVES

• MARKETING: To increase salesrevenue by 10%

INDIVIDUALOBJECTIVES

• Introduce 5 more clients about the businesseach year.

BusinessEthics

Ethics:

A set of values &beliefs which

influences howindividuals, groups &

society behave

Business Ethics:

Concern with how

such values & beliefsoperate in a bss.

Help firms to decide whataction are right or wrong

in certain circumstances

IMPORTANT TERMS TO BE REMEMBERED

(C) AIMS AND OBJECTIVES

(D) ETHICAL OBJECTIVES

Operational Objectives Low-level objectives which are addressed to individuals or small groups.

HIERARCHY OF OBJECTIVES EXAMPLES



E07B-Hanif-May 09

•Forced to turn down cheaper suppliers who test onanimals

Increasing cost

•Forced to turn down profitable business

Loss of Profits

•Alter the way it approaches business matters.

Business Practice

•Shareholders may object if by being ethical, theirinvestments is harmed.

Profit vs Ethics

•Some suppliers only supply products of business thatis ethical.

Relation with Suppliers

• Increasing no. of customersare taking into account afirm's behaviour whenbuying their products

• Increase in sale

Consumer'sViews

• Improvements in therecruitment and retentionstaffs.

• More able to recruit wellqualified & motivated staff.

Employees

• Employees with highmotivation due to the good

name of the firm.

Employee'sMotivation

BENEFITS OF ETHICAL BEHAVIOUR EFFECTS OF ETHICAL BEHAVIOUR



E07B-Hanif-May 09

•aligning a company's activities with the social, economic and environmental of its stakeholders.

•organizations consider the interests of society by taking responsibility for the impact of their activities on customers,

employees, shareholders, communities and the environment in all aspects of their operations.

CORPORATE SOCIAL RESPONSIBILITY (CSR)

BARRIERS TOCORPORATE

RESPONSIBILITY

Cost and profit

> may raise the cost

> profit will decrease

Informationavailable toconsumers,

governments andpressure groups

> without it, it isdifficult to monitor

the bss activities.

Value and beliefs

> value and beliefs of managers and

employees of a bss maynot correspond withwhat the majority of others in a society

regard as responsible.

SOCIAL AUDITING- Defined as: A check to make sure the financial performance of

bss is accurately shown in its accounts.

- Process by which a bss org attempts to assess the impact of

entire range of its activities on stakeholders.

- To evaluate its performance against a set of non-financial

criteria (its effect on environment, its attempts to meet social

obligation to employees.

- May involve:

o Indentifying the social obj and ethical values of the org.

o Defining the stakeholders of bss.

o Establishing social performance indicators.

o Measuring performance, keeping records & preparing social

accounts.

o Submitting the accounts to an independent audit and

publishing results.

- May include:

o The salary difference between the highest and lowest paid

employee.

o Health and safety information.

o The extent to which employees feel valued.

o The view of consumers about whether the bss is living up to its

Benefits of social auditing:

Provide valuable information to pressure groups & consumers

about corp responsibility of a bss.

Allow the managers of a bss to gain a complete picture of the

impact of the bss’s activities.

Preventing future criticism of its activities.

Able to identify the extent to which it is meeting some of its non-

financial activities.

Shareholders can use it to raise questions about bss’s activities at

annual shareholder meetings.

Gov can use social audit of a range of bss in particular industry to

assess the need of legislation or regulation of bss in the industry.

Bss might have to change:

The aims and objectives of bss

Operating methods, this might lead to

increasing costs.

The relationship with employees which

involve changing work practices.

The relationship with other

stakeholders, including suppliers andpeople in the local community.

Changing the organization of bss.

Taking into account the needs of

consumers when making marketing

decisions.

Providing help to bodies and

organization outside of bss.

intervene directly so that

consequences for it behaviours.

gov create legislation which bss must

adhere to.

some prob may occur:

o bss can obey the 'letter of the law'

rather than the 'spirit of the law'.

o legislation which only applies

within national boundaries may

not effect bss in other countries.

Gov work with particular

industries & bss sectors to

encourage the creation of

regulatory bodies which help to

control the activity of bss.

Voluntary org tend to monitor the

behavior of relevant firms.

Gov by threatening legislation if

the self-regulatory bodies are not

seen to be working

Free market will act effectively to

police less responsible bss.

Consumer behaviour will force

irresponsible bss to act with greater

accountability.

This is likely to happen when the

consumers have sufficient

Campaign from some of pressure

groups (animal welfare, etc) may

affect the bss.

If they fail, they called for greater

democracy in corporate

behaviour which involved the

stakeholders of the company.



E07B-Hanif-May 09

Areas of corporate social

objectives:

The

environment

Energy

Fair businesspractice

Humanresource

Communityinvolvement

Products

ENVIRONMENTAL AUDIT

A systematic review of the interaction

between an organization and the physical

environment.

Looks at the org’s compliance with

environmental regulations and its

environmental policy, the environmental

risks to which it is exposed, waste

Aims of environmental audit:

-

Verify compliance with environmental, health andsafety legislation.

- Verify compliance with the org’s own policy.

- Minimize human exposure to risk and ensure that

health and safety provisions are adequate.

- Identify corporate risk from potential environmental

failure.

- Increase the workforce’s awareness of company’s

environmental policy.

- Identify ways to further reduce waste and energy

usage.

- Satisfy external pressure from customers, insures,

ethical investment trusts and the community

Typical environmental audit will cover the following areas:

compliance with current and proposed legislation and regulations

transport:

o fuel efficiency

o precautions taken when transporting toxic substances

o vehicles emissions

energy use:

o energy efficiency

o recycling waste energy

waste:

o disposal methods

o waste management

o waste minimization

o recycling

o emissions

o procedures for dealing with accidental spillages

materials:

o use of environmentally friendly materials

o extent to which materials are renewable

o substitution of toxic materials with non-toxic ones

impact on landscape and habitats:

o damage to habitatso ways to reduce damage, preserve natural habitats and make sites attractive as

2 variations on environmental audit:

Environmental review

Environmental impact review

Arguments for CSR Arguments against CSR

Creation of a better social environment benefits

both society and bss

The primary task of bss is to maximize its profits by

concentrating on commercial activities

Power should be used responsibly Social involvement results in higher prices tocustomers

Social involvement creates a favourable image

for the company

Social involvement reduce economic efficiency

Bss has the resource to help solve social

problems

Social activities reduce the international

competitiveness of local businesses

Bss & society are interdependent Company director have a duty to shareholders

Social involvement discourages additional gov.

intervention

Businesspeople lack the social skills to deal with

problems of society

Bss org(s) should adopting

socially responsible policies

Firms should do things with

integrity, openness and

honest cooperation

Activities are to evaluated on

social responsibility criteria

along with other criteria

Social or external costs

are to be seen as part

of operating expenses

Firms need to be

prepared to use its

resources for wider

social purposes



E07B-Hanif-May 09

1.4 STAKEHOLDERS

DEFINITION:

- A person or group that is involved in and can be affected by a particular organization, project system etc

(Dave Hall)

- All people or groups that affect, and are affected by a business organization (Oxford Business Dictionary)

- People or groups who are affected by and/or able to influence the behavior of business organizations

(Lecture notes)

EXTERNAL

INTERNAL

EXTERNAL

Types of Stakeholders

Government

Owners/

Shareholders Managers Employees

Suppliers Community

Customers



E07B-Hanif-May 09

(A) INTERNAL STAKEHOLDERS AND THEIR ROLES IN BUSINESS

1)

ENTREPRENEUR

Provides innovation

- Has business idea Indulge in new business where business

never existed

Provides organization

- Land, labour, capital are hired and organized to produce goods and

services

- Makes decisions about Premises

Method of production

Product design

Wages Risk taking

2)

SHAREHOLDERS

(OWNERS)

Become joint owners of business

To receive dividends from after-tax profits

To ensure the growth of business

To ensure the stability/security of business

To share in the success/profitability of business through an

appreciating share price

To ensure high share value (to maximize profit)

3)

DIRECTORS

Direct strategies and major decision making of business

To retain control of business

To increase market share and business growth

To increase own power and status from business growth

Ensure security of business

Ensure profitability of business

4)

MANAGERS

Actively involved in running the business day to day

Organizing and decision making (in their own hierarchies)

Ensure security of business

Accountability (to owners) To ensure promotion prospects

To ensure job satisfaction

5)

EMPLOYEES

To receive fair wage

To ensure good working conditions

To secure their jobs through survival and expansion of business



E07B-Hanif-May 09

To ensure job satisfaction

(B) External Stakeholders

Definition: Stakeholders who are indirectly involved with the firm.Below are their objectives and interest in a business/to a firm

Customer

•To obtain good value for money from the goods and services purchased.

•To receive high level of customer services.

•To receive after sales services and supply of spares from a bss which survivesinto the future.

Government

•To receive tax revenue from profitable firms.

•To direct operation of the bss for the benifit of community/nation.•To control bss operation and performance to ensure it is within the EU/National laws.

•To assist bss in accordance with local/national policy.

•To ensure bss provide employment

•Controlling the impact of bss activity to environment.

Bank lenders

• To be paid back in full when repayments are due.

• To receive interest on the loan when due.

Community

• To benifit from employment the bss creates.

• To be free from environmental disadvantages.

Suppliers

• To continue selling profitably to the bss.

• To be paid promptly and fully for the goods supplied.

Competitors

• To compete by all lawful means.

• To differentiate products from those of other bss.

• To compare and contrast performance with other bss.



E07B-Hanif-May 09

Employees

They seek for fair wages.Conflict raises when

managers pay them withunfair levels of wages.

Conflict occurs whenthere're rationalisationleading to redundancy.

They feel threathen of losingtheir jobs.

Working Conditions isuncomfortable for the them.

Their safety might be takenfor granted by the

managers.

Shareholders Conflict may arisewhen they seek forshort term profits.

The bss however isaiming for long term

profits.

Conflict with managers/directors. This is whenmanager might pursue their own interest, payingthemselves high salaries, organising time whichsuits their own needs. Only satisfactory levels of

profits generated. Shareholders however want highprofits.

CustomerCnflct might occur when

the products and servicesoffered is not satisfying.

Inefficient delivery serviceto them.

Unable to achive goodvalue for money.

Does not receive aftersales service.

Cnflct with bss/owners

when price is high. Ownersare maximizing their

profits while consumerwant cheap product.

Suppliers

Conflct withmanagers when

they take too longto pay for products.This cause hardship

for smallersuppliers.

Cnflct with managers/shareholdersof a bss if they make late delivery.

Stakeholders tend to have conflicts with another class of stakeholders. Below are some causes or

situation reflecting the incident.



E07B-Hanif-May 09

Government

• cnflct when there's unethical bsswhich disobey rules and regulation setby the gov

Competitors

• plagiarism of products lead to cnfltcwith the bss.

Comunity

• cnflct happen when bss activitythreathen quality of life of the localresident.

• Also when bss cannot offeremployment

Bank lenders

• Managers could not pay back in fullwhen repayments are due.



E07B-Hanif-May 09

1.5 EXTERNAL ENVIRONMENT

PEST Analysis

Political/Legal Economy Social Technology



E07B-Hanif-May 09

POLITICAL/LEGAL

Political Environment

Concerns the activities of the government

and political environment trends (general

stability of the country).

Roles of Government

Provider of goods and services

Buyer of goods and services

Regulation/Deregulation

Taxation

Direct & Indirect

Effects of taxation on business:

o Reduces profits available for reinvestment and distribution to shareholders as a result of corporation tax (tax on company profit)

o Reduces willingness, as well as ability to expand

o Raises the price of goods and services, causes contraction in demand and reduces the volume of

goods and services sold – as a result of expenditure tax/ value-added tax (VAT)

o Reduces disposable incomes and therefore consumer spending as a result of income tax

o Alters income distribution – the impact on business will vary, but producers of luxury goods will

suffer if income is redistributed to the less well off

SWOT Analysis

Internal

Strength

Weakness

External

Opportunities

Threats



E07B-Hanif-May 09

Budget

Government provides certain welfare

benefits to various groups in the society

o This involves a transfer of income

from taxpayers to benefit receivers

o The purchases of those receiving

benefit are likely to be different

from the better off taxpayers

o Business that provide good and

services for the better off may

suffer a fall in the volume of trade,whereas business providing goods

and services for the less well off

might benefit

Spending

Direct spending of the government on

goods, services and labour

Examples:

o Infrastructure, school building and

health

There are many private sectors that rely

heavily in government contracts

The business community benefits from the

Government spending on infrastructure

which involves basic services that areessential to industrial society

TaxationDisposable

incomesSpending

powerAggregatedemand



E07B-Hanif-May 09

Policies

Reasons of government policies:

o Achieve a certain production

targets

o Achieve a particular structure

within an industry

o Promote growth, investment and

technical progress

Competition policy – correct the abuse of

monopoly power

Regional policy – assist areas of high

unemployment, declining industry

Assistance for small firms

Macro-Economic Policies

Fiscal Policy – Concerns about the decisions

of the government on expenditure, tax

rates and government borrowing

Monetary Policy – Concerns the decisions

about the interest rate and the supply of

money in the economy

Recession

ExpansionaryFiscal Policy

•Raisegovernmentspending

•Lower tax rates

Increase

aggregatedemand

Increase in

output andemployment

Boom

ContractionaryFiscal Policy

•Reducegovernmentspending

•Raise tax rates

Reducesaggregatedemand

Reducesoutput,

employmentand inflation

Interest Rate Exchange RateAppreciation /

Depreciation of currency

Legal

The law andemployment practices

The law and consumerrights

The law and businesscompetition



E07B-Hanif-May 09

E C O N O

M I C



E07B-Hanif-May 09

MICROECONOMICS

DEMAND AND SUPPLY

DEMAND

Demand is the amount of product that consumers are willing and able to purchase at any given price. Demand is

concerned with what the consumers are actually able to buy (what they can afford to and would buy), rather than

what they would like to buy. The change in price of a good and service will lead to a change in the quantity

demanded.

Price VS Quantity demanded for good/service

CHANGES IN DEMAND

Factors and effects:

INCOME Higher incomes of consumers will be able to

buy. Demand of a product will only increase if the

incomes of those consumers buying the product

increase.

THE PRICE OF AND DEMAND FOR OTHER GOODS

The demands for one product often depend on the

price of and demand for another. A rise in the price in

one brand is likely to cause an increase in the

demand for others.

COMPLEMENTARY Goods are those which are used

together. Example, cars and petrol. An increase in

the price of one will affect the demand for another.

CHANGES IN TASTES AND FASHIONS Some products

are subject to changes in tastes and fashions. It is

more usual for a company to stop producing

products which have gone out of fashion altogether.

CHANGES IN POPULATION Changes in population

levels, changes in the structure of population can

affect demand.

ADVERTISING Successful advertising and promotion

will shift the demand curve to the right.

LEGISLATION Government policies can affect the

demand for a product. Example, a law requiring all

cyclists to wear helmets would lead to an increase in

the demand for cycling helmets at any given price.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

20 40 60 80 100

£

Quantity demanded

demand



E07B-Hanif-May 09

SUPPLY

Supply is the amount of a product which suppliers will offer to the market at a given price. The higher the price of a

particular good or service, the more that will be offered to the market. A change in price will cause a movement

either up or down the supply curve. The curve will not change its position assuming that all other factors remain thesame.

Price VS Quantity supplied for good/service

CHANGES IN SUPPLY

Factors and effects:

COSTS OF PRODUCTION A fall in costs of production

will mean more can be offered at the same price.

This will cause the supply curve to shift to the right.

CHANGES IN PRODUCTION Where it is possible to

shift production from one area to another, the price

of other products can influence the quantity

supplied. For example, a rise in the price of broccoli

might encourage farmers not only to produce more

broccolis but less of other crops.

LEGISLATION A new anti-pollution law might

increase costs causing the supply curve to the left.

THE OBJECTIVES OF FIRMS Firms might seek to

increase their profit levels and their market share.

This might reduce the overall level of supply as other

firms are forced out of business.

EXPECTATIONS If businesses expect future prices to

rise they may restrict current supplies.

THE WEATHER The weather can influence the supply

of agricultural products.

0.00

0.50

1.00

1.50

2.00

2.50

3.00

20 40 60 80 100

£

Quantity supplied

supply



E07B-Hanif-May 09

PRICE

EQUILIBRIUM PRICE

The point at which the demand and supply curves

intersect is known as equilibrium price where PO=QO.

Section A shows an excess demand where demand

for a product is greater than supplied. This will lead

to shortage of products and many consumers being

left disappointed. Section B shows an excess supply

where supply for a product is greater than

demanded. This will lead to many products being left

over with no immediate buyers.

CHANGES IN DEMAND

Assume that there has been a rise in income which

resulted in an increase of demand. The demand

curve will shift to right. If demand increase from D1

to D2 , the quantity demanded will also increase from

Q1 to Q2. Thus, the equilibrium price will rise from P1

to P2.

CHANGES IN SUPPLY

An increase in supply may have been as a result of

lower labour costs. This shifts supply curve from S1 to

S2 which leads to the equilibrium price falls from P1

to P2. Consumers are more willing and able to buy

goods at lower price and the quantity demanded

rises as well from Q1 to Q2.



E07B-Hanif-May 09

ECONOMIES OF SCALE

ECONOMIES OF SCALE

These are the reductions in a firm’s unit (average)

costs of production that result from an increase in

the scale of operations. The cost benefits can be

substantial in some industries that smaller firms will

be unlikely to survive due to lack of competitiveness.

They arise for five main reasons:

PURCHASING ECONOMIES- also bulk buying

economies. Suppliers will often offer

substantial discounts for large orders.

TECHNICAL ECONOMIES - 1.Large firms are

more likely to be able to justify the cost of

flow production lines. If these are worked at

high capacity level then they offer lower

unit cost than other production methods. 2.

The latest and most advance technical

equipment. Such expense can only be

justified when output is high so that fixed

costs can be spread ‘thinly’.

FINANCIAL ECONOMIES- 1. Banks and other

lending institutions often show preference

for lending to a big business with a proven

track record and diversified range of

products. 2. Raising finance by ‘going public’

for existing Plc. Is very expensive.

Prospectus publishing costs and advertising

charges will not vary greatly whether it is a

large or small issue of shares. Therefore, the

average cost of raising the finance will be

lower for larger firms selling many millions

of dollars’ worth shares.

MARKETING ECONOMIES- Marketing costs

obviously rise with the size of a business,

but not at the same rate. These costs can be

spread over a higher level of sales for a big

firm and this offers a substantial economy

of scale.

MANAGERIAL ECONOMIES- Small firms

often employ general managers who have a

variety of management functions to

perform. As a firm expands, it should be

able to afford specialist functional

managers who should operate more

efficiently and the chance of them making

mistakes is lesser.



E07B-Hanif-May 09

DISECONOMIES OF SCALE

There are disadvantages to large-scale operations

too. Diseconomies of scale are those factors that

increase unit costs as a firm’s scale of operation

increases beyond a certain size. These diseconomies

are all related to the management problems

associated with trying to control and direct an

organization with many thousands of workers, in

many separate divisions, often operating in several

different countries.

Causes of management problems:

Communication problems in larger

organizations

Alienation of workforce

Coordinating the business

Inflexibility

WAYS TO AVOID DISECONOMIES OF SCALE:

Management by objectives

Decentralization

Reduce diversification



E07B-Hanif-May 09

THEORY OF FIRM

Economists construct models of the market ranging, at one extreme from the ideal of perfect competition through

various forms of imperfection to pure monopoly at the other extreme.

MONOPOLY

It occurs when one business has total control over a

market and is the only seller of the product.

Monopolists are likely to erect barriers to prevent

others from entering their market. They will also

exert strong influence on the price which they charge

for their product. Because of the influence

monopolists have on their price, they are often called

PRICE MAKERS.

Monopolies tend to make ‘abnormal’ profits

compared to competitive businesses. However, there

may be little or no incentive for a large business to

innovate if it faces a lack of competition. It may

therefore be less efficient and profitable than it is

capable of being, resulting in inefficient

management and a lower dividend for shareholders.

Effects of monopoly and perfect competition:

Prices It might be expected that prices for

consumers would be higher under

monopolies. However monopolies can

sometimes provide consumers with lower

prices than businesses operating under

competitive conditions. This is because large

size of monopoly businesses allows them to

gain economies of scale.

Choice It could be argued that a large

number of businesses competing against

each other will lead to greater choice of products for customers. But there are

conditions where competition does not lead

to wider choice for consumers because

competing businesses tend to replicate the

products of their competitors.

Innovation Businesses in competitive

markets have the incentive to innovate as

they try to differentiate their products from

those of competitors. However, the

relatively large profits made by monopolies

allow them to invest heavily in R&D

OLIGOPOLY

When there are many firms but only a few dominate

the market, oligopoly is said to exist. Under

oligopoly, each firm will have a differentiated

product, often with a strong brand identity. Several

brands may be competing in the same market.

Businesses often follow the price of the market

leaders. This means they tend to be interdependent.

Barriers to entry exist:

Legal restriction, such as patents

High start up costs, such as cost of

manufacturing

The promotion or advertising required

Arrangements between businesses

Collusion between businesses in cartels,

which act together to prevent new entrants



E07B-Hanif-May 09

MACROECONOMICS

GOVERNMENT ECONOMIC OBJECTIVES

ECONOMIC GROWTH

GDP

The total value of goods and services produced in a country one year is called the Gross Domestic Product. This is

measured in monetary terms, and inflation will raise the value of GDP. This increase is NOT ECONOMIC GROWTH.

Economic growth in the economy occurs when the real level of GDP rises as a result of increase in the physical

output of goods and services in an economy.

GNP

A measure of the amount of income generated as a result of a country’s economic activity

Why growth considered so desirable by governments?

Higher real GDP increases quantity of goods

and services-higher living standards

Higher output lead to increased

employment-increase consumer incomes

Absolute poverty can be reduced if growth

is substantial enough and the benefits are

sufficiently dispersed

Businesses should experience the rising

demand for their products

Higher GDP makes more resources available

for government through greater income

from taxes and decreased burden of social

expenditure

THE BUSINESS CYCLE

BOOM (PEAK) In a BOOM consumer spending and

investment will be high. Many businesses will

experience high levels of demand from people with

increasing incomes. Profits should be high for most

firms and wages might be rising. Output will be high

and the economy will be growing steadily. Business

and consumer confidence is also likely to be high.

RECESSION A RECESSION is where incomes and

output start to fall . Business might experience a fall

in demand for their products and a decline in profit.

Some might start to lay off workers.

SLUMP (THROUGH) A SLUMP occurs at the bottom

of the cycle. Unemployment is likely to be high and

confidence, spending, investment and profits low.

Many firms may be forced out of business.

RECOVERY A RECOVERY is where income starts to

rise again after a slump. Output will begin to

increase as spending and confidence increases.



E07B-Hanif-May 09

Business will start to employ more workers as a result.

OPPORTUNITIES OR THREATS

When demand continues to rise at BOOM stage,then serious problems for the economy can result in

government action to ‘deflate’ or reduce demand.

(Inflation can result from demand-pull that will be

discussed later on) As growth continues towards

BOOM conditions and the economy approaches full

capacity, a number of other problems are likely to

arise:

Demand-pull inflation will accelerate,

reducing industrial competitiveness and

leading to higher wage demands.Labour shortages will become a problem,

especially for skilled workers in high

demand. This will cause wages and business

costs to rise.

Unemployment will be low and incomes will

be rising and will encourage consumers to

borrow more to spend on durable goods.

Prices of these goods will rise and high price

of housing will be particular concern to

government.

As incomes continue to rise, demand for

imports will rise. Home-based firms will find

easier to sell goods on domestic market

than overseas and may switch production

away from exports towards the homemarket. The result of these two trends is for

a current-account deficit to become a

serious problem. The country will be

spending more foreign currency than it is

earning.

However not all RECESSION is bad. There will be

opportunities which well-managed firms may be

able to take advantage of:

Capital assets such as land and property,may be relatively cheap and firms could

invest in expectation of an economic

recovery

Demand for ‘inferior’ goods actually

increase

The risk of job losses may encourage

improved relations between employers and

employees-increase efficiency

Hard decisions may need to be taken

regarding closures of factories and offices-

make business ‘leaner and fitter’ and betterable to take advantage of economic growth

when this eventually starts again.



E07B-Hanif-May 09

LOW INFLATION

Inflation can be defined as an increase in the average price level of goods and services, whereas deflation is the fall

in average price level of goods and services. Governments set target rates of inflation. They aim for rates lower

than or same as those of their main international competitors.

Retail Price Index (RPI) is used to measure average price changes. Each month, government statisticians would

record prices of items that commonly feature in an ‘average’ household’s budgets. The changes are then

‘weighted’ to reflect the importance of each item in household budgets. All of the weighted price changes are then

averaged and given an index number. The base year is given a value of 100.

RPIX is another measure of inflation. It removes mortgage payments from the RPI figure. This is known as

‘underlying’ inflation.

Consumer Price Index (CPI) is similar to the RPI but is more sensitive to changes in household spending and allows

better comparison with inflation in other countries.

CAUSE OF INFLATION

COST-PUSH

In certain situations, businesses are faced with

higher costs of production. These could result from:

Rises in wages and salaries

Tax increases

Profits – an increase in costs to raise profit

levels due to pressure from shareholders

can increase production costs

Imports-prices of imported goods may rise

due to lower exchange rate

World demand for materials raises their

prices

When businesses face higher costs of production,

they will attempt to maintain profit margins, and

one way of doing this is to raise selling prices. This

becomes cost-push inflation.

DEMAND-PULL

When consumer demand in the economy is rising,

usually in BOOM stage, producers will realize that

existing stocks can be sold at higher prices. If they do

not raise prices, stocks could be sold out, leaving

unsatisfied demand. The increase in demand can be

due to:

Rise in consumer spending

Firms investing in more machinery

Government expenditure increasing

More exports being bought abroad



E07B-Hanif-May 09


If inflation rate is quite low, business can gain the

following benefits:

Cost increases can be passed on toconsumers more easily if there is a general

increase in prices.

The real value of debts owed by companies

will fall. Because the value of money is

falling, when a debt is repaid it is repaid

with money of less value than the original

loan.

Rising prices are also likely to affect assets

held by firms, so the value of fixed assets

could rise. This will increase the value of a

business and when reflected on the balancesheet, make the company more financial

secure.

However, higher rates of inflation, say above 10%

per year can have serious drawbacks for business:

Higher wage demands are likely and there

could be an increase in industrial disputes.

Consumers are becoming much more price

sensitive and look for bargains rather than

big brand names.

Rapid inflation will often lead to higher

rates of interest. These higher rates make it

difficult for highly geared companies to find

the cash to make interest payments,

despite the fact that the real value of debts

is declining.

Cash-flow problem may occur for allbusinesses as they struggle to find more

money to pay the higher costs of materials

and other costs.

Inflation adds to uncertainty about the

future. This will be the case in particular

with sales forecasts and with investment

appraisal, which requires estimates about

future cash flows.

Businesses that sell goods on credit will be

reluctant to offer extended credit periods

Consumers may stockpile some items or

transfer their disposable income to

commodities that are more likely to hold or

increase their value.

Therefore, during periods of rapid inflation, business

may:

Cut back on investment spending

Cut profit margins to limit their own price

rises

Reduce borrowing to levels at which theinterest payments are manageable

Reconsider their creditor policy

Reduce labour costs



E07B-Hanif-May 09


Demand The obvious effect of unemployment is that

people are not earning income and are likely to

spend less. Business will suffer a loss of demand for

their products.

Organization Unemployment can have a number of

effects on the internal organization of a business.

The firm can no longer afford to recruit new

members of staffs. This can lead to significant staff

rather than recruitment. Redundancies will add the

responsibilities and roles to those who remain in the

firm. This can lead to increasing demands on existing

employees. During periods of high unemployment,

some firms may reorganize their internal structure.

Payments Businesses may be faced with making

redundancy payments to workers. The cost of any

reorganization caused by redundancies will also have

to be borne by firms. Such costs may include lost

productivity after reorganization as employees

struggle to cope with new responsibilities.

Labour supply It may be easier for firms to recruit

new employees during a period of high

unemployment because people may be prepared to

work for less money. In this way firms can lower

their labour costs.

Output During periods of unemployment, many

firms reduce their output level to compensate for

falling demand. This can interrupt the flow of

production, causing production and stock controlproblems.

Government spending High levels of unemployment

means that government spending on social security

will be high and will lose revenue from tax and

National Insurance contributions. To make up for

this the government may borrow, increase taxation

or reduce other items of spending.

Increased trade and reduced costs The services

offered by some firms depend upon other firms

going out of business. Firms specializing in

receiverships and pawnbrokers may see an increase

in the demand for their services.

Social issues Research into unemployment leads to

poverty and stress for those individuals, families, and

communities that have high levels of

unemployment. They can also include high levels of

vandalism and crime. This lead to higher insurance

premiums for businesses.

BALANCE OF PAYMENT

Balance of payment is a record of transactions between one country and the rest of the world.

The current account The difference between the

value of money entering a country (credits) and the

value of money leaving a country (debits) for: 1.

Trade in goods and services 2. Income to/from

abroad 3. Transfers are called the CURRENT

BALANCE.

Current balance = sales of exports and services,

income earned from abroad and transfers to a

country – purchases of imports and services, income

going abroad and transfers from a country.

Capital account This involves the transfer of

ownership of assets, transfers of funds associatedwith purchase and sale of assets and the cancellation

of liabilities.

The financial account This covers the flow of money

for transactions in financial assets and liabilities.



E07B-Hanif-May 09


If a country’s economy has a large and persistent deficit on its balance of payments the serious economic problemscould result:

Depreciation in the value of its currency’s exchange rate

A decline in the country’s reserves of foreign currency

An unwillingness of foreign investors to put money

EXCHANGE RATE

Exchange rate is a price of one currency in terms of another. Exchange rates are determined by the forces of

supply and demand. It is also affected by the base interest rates set by the Central Bank.


APPRECIATIAN

When demand for a currency exceeds supply its value will rise.

The domestic firms that gain from an appreciation of the country’s currency are:

Importers of foreign raw materials and components, for whom the domestic currency cost of these

imports will be falling. This increases their competitiveness.

Importers of foreign manufactured goods, which are able to import the product more cheaply in terms of

domestic currency.

In addition, lower import prices will help to reduce the rate of inflation for the whole economy and all firms are

likely to gain from this more stable position.

The domestic firms that lose from an appreciation of the currency:

Exporters of goods and services to foreign markets. Some business may decide to locate overseas to avoid

the high exchange rate.

Businesses that sell goods and services to the domestic market and have foreign competitors as

appreciation makes imports cheaper.



E07B-Hanif-May 09

DEPRECIATION

The value of a currency is said to depreciate when one unit of it buys fewer units of other currencies.

The domestic businesses that gain from a depreciation of currency are:

Home-based exporters who can now reduce their prices in overseas markets. This should increase the

value of their exports and lead to an expansion of the business.

Businesses that sell in domestic market will experience less price competition from importers.

The home-based businesses that are likely to lose from depreciation are:

Manufacturers who depend heavily on imported supplies of material, components or energy sources.

Retailers that purchase foreign supplies, especially if they are close domestic substitutes.

INTEREST RATE

It is the cost or price of borrowing. These are the different interest rates in the economy: overdraft, mortgage, and

credit cards. In any market, such as the market of mortgage, interest rates are determined by the demand for and

supply of money. If the borrowers demand more money for mortgages, the interest rate will rise.

INTEREST RATES AND CONSUMER SPENDING

Higher interest rates can:

Increase the cost of borrowing to

consumers. Consumers then tend to cut

back on taking out loans and using

overdrafts and credit cards. This will affect

business on selling goods on credits.Lead to higher mortgage payments.

Consumers with higher mortgage payments

will have less money to spend on other

goods. People are less willing to take out a

mortgage to buy property.

The overhead cost of the business will

increase.

Stop new investment.

Encourages saving as savers gain more

money from the money saved.

Higher charges that result from interest rate

increases might persuade a business to use

retained profit to pay off outstanding loans.

This should reduce payments in future and

may lead to an increase in profit in the long

term.

Stocks are expensive to keep, so a rise in

interest rates might lead a business to cut

back on stocks, especially if it has borrowed

to buy them. It might also decide that

saving is a more profitable option.

If interest rates rises, saving and invest in

UK becomes more attractive. Demanding

more pounds leads to a rise in the exchange

rate.



42 BUSINESS NOTES (SEMESTER 1)

SOCIAL

TECHNOLOGY

Demographical Factor

•Age distribution - Birth rate, death rate, immigration/emigration

•Fertility rate

•Infant mortality rate•Natural increase

•Reproductive rate

•Structure of population - affects patterns of employment, demands of consumers

Geographical

•Age and location - Young people like to live in urban areas compared to older people

•Urban and rural location - Encourage business and entertaintment outlet to in urban areas

•Age and migration - Young people have higher mobility compared to old people

Social Cultural

•Aspects of lifestyle and culture of the population

•Determines what is acceptable and unacceptable in a product•Reference group - people who influences us

•Concerns about food safety

•Concerns about animals welfare

•Concerns about the environment

•Concerns about beuty and hygiene

•Changing of roles in household buying

THE IMPACT OF TECHNOLOGY

Communication

•Increase usage of the internet

•Influence interfacewith supplies andcustomers

Product Technology

•Impact on designand manufacture

•Determines sppedof production, qualityof products, rolesof workers

•Management /disposal of waste

•Creates newdemand throughnew products

Costs of production

•Increases fixedcosts and thusneeds large market

•Encouragesmergers to createlarger firms in orderto spread costs

•Larger firms usetechnology, requireless workers thusincreasing labourproductivity

Human Resourses

•Affectsemployment

•Affects the rolesand skills of workers

•A flattening of organisation charts

Market

•Increases range of products

•Increasesmarket/distributionof products - eg.online market

•Affects pricing of products

•Increases

competition in themarket

•Changes thepattern of demand




1.6 ORGANIZATIONAL PLANNING TOOLS

SWOT ANALYSIS

Examine the present situation of the business (its strength and weaknesses) and future possible changes

(opportunities and threats)

Important part of strategic planning: the firms assesses where it is now and what might happen in the future in

order to plan its strategy. The strategy may seek to build on its strength and/or protect against its weaknesses. The

firm will seek to exploit opportunities and deflect threats.

SIMPLE RULES FOR SUCCESFUL SWOT ANALYSIS

Distinguish where your organization is today and where it could be in the future

Always be specific. Avoid grey areas

Always apply SWOT in relation to your competition, better or worse

Keep your SWOT short and simple. Avoid complexity and over analysis

SWOT is subjective

STRENGTHS

•Resources and capabilities that can be used asa basis for developing a competitiveadvantage.

•Examples:

•Marketing – brand name, distribution

channels•Finance – cash flowposition, liquidity, profitability

•People – skills, motivation, ideas

•Operations – flexibility, volume, unitcost, quality

•Exclusive access to certain resources

•(5ps – people, products, place,processes, procedures)

WEAKNESSES

•The absense of certain strengths, the flip sideof strengths

•Examples:

•Marketing – weak brand name, poorreputation

•Finance – poor budget control

•People – pack of trained/effectiveworkforce, lack of direction

•Operations – poor productivity

OPPORTUNITIES

•The change in external environement thatmay bring new opportunities for growth andprofits.

•Examples:

•Unfufilled customers’ needs (S)

•Arrival of new technology (T)

•Loosening of regulations (P)

•Removal of international trade barriers (P&E)

THREATS

•The change in the external environment thatpresent themselves as threats to the firms.

•Examples:

•Shifts in consumers’ taste away from the

firm’s products (S)

•Emergence of substitute products (E&T)

•New regulations (P)

•Increased trade barriers (P&E)

SWOT




DECISION MAKING

Reason in making a decision

To decide which course of action to take from the various possible alternatives

To solve problems in a business

TYPES OF DECISION MAKING

DECISIONS MAKING PROCESS

Strategic decisions

•More to general directionand overall policy of business

•Long term decisions andable to influence theorganizations

Performance

•Long term and high risk

•Made by the owner of thebusiness

•In some public limitedcompanies, decisions aremade by the board of directors

•Others may requireshareholder’s consent

Tactical decisions

•Medium term decisions

•Can be calculated andmore predictable

•Used to implementstrategic decisions

•Made by the manager of the business

•Required to implementstrategic decisions

•Important tacticaldecisions made by thethose in the top of thebusiness hierarchy

•Less important made by junior managers

Operational / administrativedecisions

•Lower level decisions

Short term and low risk

•Require much less thought andevaluation

•Made by (nearly) all employees

•Sometimes required

guidance/approval from managers•Delegating decisions to those

further down the hierarchy can bemotivated

•Led to improvements in efficiencyand quality

•Reducing the chain of command canimproved the decisions making

Identifying objectives

•The business objectives may be differ atthe different stages of growth

•Need to develop criteria to measurewhether it has achieved its objectives

Collecting information and ideas

•The amount and nature of the informationneeded depend on the decisions

•Ideas from working party to collect informationand ideas within the firm or from discussionsamong staff

Analyzing information and ideas

•Analyze information to look foralternative course of action

•Aim to identify which course of

action will best achieve the businessobjectives

Making decision

•Commit oneself to one course of action

•Some decisions can be reversed

•Sometimes decisions can’t be reached –

collect more information and ideas

Communication

•Personnel are informedand decisions is carried out

Outcome

•Will take time beforethe results are known

Evaluate the results

•Evaluate the results in aform of reports

•Necessary to modify thecourse of action on thebasis of the report




1.7 GROWTH AND EVOLUTION

INTERNAL GROWTH

Arises within the

company

The companies grow by using

its own resources

The expansion is based on reinvested

profit/debt financing.

EXTERNAL GROWTH

JOINT VENTURES

Definition

A joint venture is the long-term commitment of funds, facilities and services by two or more legally separate

interests, to a combined enterprise for their mutual benefits.A joint venture need not be a separate legal entity orcompany. Other forms of joint ventures include an agreement to work together formalised through a Heads of

Agreement or a Strategic Cooperation Agreement.

Occurs when a firm

invested its size by

taking over or merging

with other firm

(intergration)

Faster method

of increasing

eg: Franchises, MNC

Strategic Alliance &

Joint Venture

Mergers & Takeovers




Reason for Joint Venture

Internal Reason

•Build on company's

strengths•Spreading costs and risks

•Improving access tofinancial resources

•Economic of scale andadvantages of size

•Access to new technologiesand customers

•Access to innovativemanagerial practices

•Number of sell people willincrease because we wonthave spend to time and

money hiring newemployees

Competitive Goal

•Influencing structural

evolution of the industry•Defensive response toblurring industryboundaries

•Creation of stronger competitive units

•Speed to market

•Improved agility

Strategic Goal

•Synergies

•Transfer oftechnology/skills

•Diversification

Advantage

•extend the marketing reach

•access needed information andresources

•build credibility with a particular target market

•access new markets that wouldbe inaccessible

•without the partner

•Provide companies with theopportunity to obtain newcapacity and expertise.

•Allow companies to enter intorelated business or newgeographic markets or obtain new

technological knowledge

Disadvantage

•Risk giving control of itstechnology to its partner

•Profitable returns may take sometime to achieve

•high level of commitment of staff

and management•Cultural differences andcommunications difficulties

•Difficult to get out of quickly

•Working in a different legal andcommercial system

•Political risks in the country wherethe joint venture is based

•Potential for conflict with your jointventure partner




STRATEGIC ALLIANCES

Strategic Alliance

Relationship formed

between two or more

parties to pursue a set of

agreed upon goals or to

meet a critical business

need while remaining

independent

organizations

Why ?? How ??

Advanta es Disadvanta es

Marketing and advertisng

Gain customer trust

Gain more expertise

Expand business rapidly

Spend less time and money

Each partner must contribute

The alliance can be struck

One company will lead and the

Each partners retain bss independence

Strategic alliances can be combined with other agreements, such as licens

technology

Greater responsiveness

Opportunities for growth

Risk sharing

Increased leverage

Payment difficulties

Small company subsume by larger

Potential for conflict

High commitment – time, money, people

Strategic priorities change over time




MERGERS AND TAKEOVERS

Definition or main idea

The combination of two or more entities to achieve synergy

Merger

•integration

•combination of 2 or more co. forming a newcomany

•involves mutual decision to combine

•shares in th old co. exchanged fr equal num. of shares in th merged entity.

Takeover

•acquisition

•th purchase of one co. by anthr with no new co.being formed.

•doesnt need mutual decision to combine,even if thtarget co. doesnt wnt to be purchased.

•acquiring firm usually offers cash price per share toth shareholders of th targer firm according to aspecified ratio.

Reason

Economies of scale

Increase profit

Diversification

Cross selling

Synergy

Taxes

Resource/Techtransfer

Powersatisfactory

Monopoly

Empirebuliding




Types of mergers

Horizontal

Integration with firms in the same industry and at the same stage of production

Vertical(Forward)

Integration with a bss in th same industry bt a customer fr th exiting bss.

Vertical(Backward)

Integration with a bss in th same industry bt a supplier of th existing bss.

Merger

Horizontal

Vertical

Forward

Backward

BalancedConglomerate

Advantages

• Reduce competitor

• Possble econ. of .scales

• Increased power oversupplier

Disavantages

• Rationalization maybring bad publicity

• May lead to mnopolyinvestigation if exceeds certain limit.

Impact on stakeholders

• Customers hv lesschoice

• Employees may lose job due torationalization

Advantages

•Abe to control thpromotion and pricing of its product

•Secures a secured outletfr th firm's product andmay excludecompetitor's product.

Disavantages

•Consusmers maysuspect uncompetitiveactivity and reactnegatively

•Lack of experience-goodmanufacturer doesntneccessarily make a

good retailer


•Workers hv greater jobsecurity because th bsshas secured outlet

•More various jobsopportunities fr thcommunity

•Consumers may resentlack of competition -withdrawal of competitor's productfrom retail outlet.

Advantages

•Control overquality,price,and delivery

time of supplies•Encouraged jointresearch to improvequality of supplies of components

•Control supplies tocompetitors

Disavantages

•Lack experience inmanaging supplying

company.•Supplying bss becomecomplacent due tosecured customer.


•Greater careeropportunities to th

workers and community.•Consumers obtainimproved quality andinnovative prouct.

•Control over supplies tocompetitors may limitcompetition




Conglomerate merger

Intergration of co. that hv no common bs areas.

Takeovers

Pros and Cons of takeover

Advantages

•Diversifies in firm'sindustry and market.

•Spread risk

•Take th bss into fastgrowing market

Disavantages

•Lack of experience innew sector

•Lack of clear focus anddirection


•Greater careeropportunities fr

workers andcommunity

•More job security tothe workforce becauseof risk is spread acrossmore industries.

Takeovers

Friendly Hostile Reverse

Friendly

•usually th board of th targetcompany will be informedbefore a bidder makes anoffer

•In private co.,th shareholdersand th board are likely thsame people or closelyconnected to each

other.Thus,private takeoversare likely to be friendly as thshareholders hv agreed tosell th co.

Hostile

•Th bidder continues topursue even th board rejects.

•Th bidder makes th offerwithout informing th boardbeforehand.

•Not usually bad,as cn bebeneficial fr shareholders inorder to change fr more

effective management.

Reverse

•Private co. acquires publicco.

•Allow th private co. to floatitself while avoiding thexpenses and time involvedin a conventional initialpublic offering(IPO)

Pros

•Increase sales/revenue

•Venture into new bss and markets

•Pofitability of target co.

•Increase market share•Decrease competition

•Reduction of overcapacity in th industry

•Enlarge brand portfolio

Cons

•Reduced competition and less choice frconsumers

•Likelihood of price increases and job cuts

•Cultural integration/conflict with newmanagement

•Hidden liabilities of arget entity




Problems associated with rapid growth

Diseconomies of scale

Factors that increase unit costs as a firm’s scales of operation increases beyonf a certain size

Factors :

Communication problems

Alienation of workforce-lack motivation

Duplication of effort

Office politics

Poor and slow decision making

Inertia-unwillingness to change

Cannibalization- self competition

Public and government opposition

Solutions :

Management by objectives

Decentralization

Reduce diversification-focus on core activities

•Additionl capital in runing bigger firm,can lead to negative cashflw and ncrease in long-term borrowing.

Financial

•Problems in coping with larger bss operation.

•Lack of coordination between divisions(Decentralization may solve this)

Managerial

•Original marketing strategy may not be appropriate,as having wider range of products.

Marketing

•True for target co. hat hv been acquired by larger co

•Original owners might lose control when power conflict happens

Loss of control by original owners




Definition

FRANCHISE

A type of license thata party

(franchisee) acquiresto allow them to have

access to a business' (thefranchisor) proprietary

knowledge, processes andtrademarks in order toallow the party to sell a

product or provide aservice under the business‘

name.

FRANCHISOR

A party ina franchising

enterprise thatultimately owns therights, trademarks

and proprietaryknowledge of thespecific business

entity.

FRANCHISEE

The party in afranchising

agreement that is

purchasing the rightto use a business's

trademarks, associated brands and

other proprietaryknowledge in order

to open a branch

ROYALTY

A payment to anowner for the use

of property, especially

patents, copyrighted works, franchisesor natural resources




2. Assignedterritory.

3. Duration of the franchiseagreement

4. Franchise feeand total

anticipatedinvestment

5.

Trademark, patent, and signage

use.

6. Royalties andother fees you

are expected topay.

7. Advertising

8. Operatingprotocol.

9. Renewal rights

and franchiseetermination/cancellation policies

10. Resale rights.

1. Trainingand/or ongoing

support providedby the franchisor

To protect the copyright and privacy rights of both parties.

Create a balance between individual privacrights and the needs of organizations to

collect, use and disclose personal informatiofor reasonable commercial purpose.

Protect its brand name. Avoid fraud

Importance of agreement.

Content of Franchise

Agreement




FRANCHISOR

The businessesunder theultimate

control of thefranchisor can

spread rapidly

The franchisorhas a built-in

and captivemarket for allhis products

with littlefinancial

commitment

A significantincome can be

earned withoutthe hard workof meeting and

dealing withcustomers

face-to-face.

Establishedbrand

Training

Volumepurchasing

power

advertisingProven

businessmodel

Accountingand budget

systems

Others help

running yourbusiness

ADVANTAGES of

Franchisee




DISADVANTAGESof Franchisee

loss of control

The franchisormight go out of

business, orchange the waythey do things

Otherfranchisees

could give thebrand a badreputation

The franchisormay makemistakes in

their policies

You may find it

difficult to sellyour franchise -

you can onlysell it to

someoneapproved by

the franchisor

The franchiseewill have to paythe franchisor

for the servicesprovided and

for the use of the system

Franchisor

Problems oncontrolling the

franchiseeoperation in a

long run.

Failure by anindividual franchiseewill reflect badly onthe whole franchise

operation




Definition of multinationalcorporation

A corporation orenterprise that manages

productionestablishments or

delivers services in atleast two countries.

Not merelyimporters/exporters(produce goods and

services in more thanone country.

Some MNCs have annualsales turnovers

exceeding the size of many countries’ entire

economies.

They can have apowerful influence ininternational relationsand local economies.

Corporation that havetheir headquarter in one

country but operatingbranches, factories, and

assembly plants inothers.

1.9 GLOBALIZATION

MULTINATIONAL COMPANIES




Advantagesof being

multinationalcorporation

To become nearer tomarkets throughout

the world

- Better marketinformation regardingconsumer tastes as aresult of closeness to

themGrowth motive

•- A company may havereached a plateausatisfying domesticdemand, which is notgrowing. Looking fornew markets.

Market competition- The most certain

method of preventingactual or potentialcompetition is toacquire foreign

businesses

Avoid ImportRestrictions

•- When production isdone in hostcountry, there is noneed to pay importduties/importrestriction

Government grantsand tax incentives .

- The favorable taxrates in an offshorecountry are designed to

promote a healthyinvestment

environment thatattracts outside wealth.

High TransportationCosts

- Transportation costsare like tariffs in that

they are barriers whichraise consumer price

Avoiding legislation inhome country

- Legislation or otherrestrictions can be

avoided by themultinational basing

some of its operationsin a different country




Advantagesof being


Spread risk

- In one area of thebusiness is doing

badly, more successfulones will help keep the

business intact

Diversification of Investment

- In some

countries, regulationsrestrict theinternationalinvestment

opportunities of citizens. Offshore

accounts are muchmore flexible, givinginvestors unlimited

access to internationalmarkets and to allmajor exchanges

Tax Reduction

- Many countries(known as tax havens)offer tax incentives to

foreign investors.

Confidentiality

- Many offshore jurisdictions offer thecomplimentary benefitof secrecy legislation

Lower costs of production

- Lower labour ratesdue to much lowerdemand for local

labour compared todeveloped economies

Asset Protection

- Offshore centers are

popular locations forrestructuringownership of assets.

Throughtrusts, foundations or

through an existingcorporation individualwealth ownership canbe transferred frompeople to other legal

entities




Advantagesof being


Cheaper rent and sitecosts

- Resulting from lowerdemand for commercial

property

Low material costs onvarious parts of the world

- Different countries havedifferent low material costs

for different materials




The threat of nationalization

forcing a company to sell its local assetsto the government or to other local

nationals

Cultural heterogeneity

MNCs' work force is bound to lead todifferent perceptions of existing

policies and patterns of organizationalbehavior and incongruent perceptions

of the desired ones.

Must Abide the law in host country.

This might increase the administrativeload and can mean staff are treateddifferently according to where the

work.

Cost

- Offshore Accounts are not cheap toset up. Setting up an offshore

corporation may mean steep legal

fees, corporate or account registrationfees and in some cases investors are

even required to own property (aresidence) in the country in which theyhave an offshore account or operate aholding company. Furthermore manyoffshore accounts require minimum

investments of between $100,000 and$1 million.

Disadvantages of being multinational

corporation




Benefits on hostcountry(impact)

Unemployment isreduced

MNC will become majoremployers of labour.

This will help alleviateunemployment blackspots.

Increase in revenue

MNC will contribute taxrevenue to the

government and otherrevenues.

Tax revenue willincrease as the profits

of the companyincrease.

MNC will contributeother revenue when

they purchase existingnational assets.

Advanced technology isintroduced

MNCs will transfer itstechnology as well as

expertise and ideas intoits host country.

Boost in investment

The investment in thecountry would increase.

This would bring foreigncurrency and if output

from the plant isexported then further

foreign exchange can beearn.

Streghtening thedomestic competition

Existence of MNCs inhost country will makethe local firms be more

competitive

Increase sale for localfirms

Local firms benefitsfrom supplying servicesand components to the

new factory.

Playing the role of government

Manygovernments, especially

in the poor world, failto meet expectations.

As a result of thisgovernance

failure, MNCs wouldbenefits them on

certain roles.




Drawbacks

to the hostcountry

MNCs engage intransfer pricingwhere they shift

production betweencountries so as to

benefit from lower tax arrangements in

certain countries

Local computingfirms may be

squeezed out of business

Pollutions from plantmight be at higherlevels than allowedin the base country.

Profits may be sentback to their own

country rather thanusing for

reinvestment in thehost countires.

Might affect the hostcountry with their

own culture

Exploitation of natural resources

Exploitation of localworkforce. Somecountries may havenot implement strict

labour and healthand safety rules




2.2 ORGANIZATIONAL STRUCTURE

business and management notes (74 pages)

Documents